Salix Pharmaceuticals, Ltd. (NASDAQ:SLXP) has backed out of a proposed Irish tax inversion with Italian firm Cosmo Pharmaceuticals S.p.A (SWX:COPN), taking a $25 million hit in the process, but also said the two companies will continue to do business together. Even though there hasn’t been any concrete move to change the rules around tax inversions, the fact that changes can be applied retroactively changes the calculation for any company thinking about a major reorganization done solely for tax purposes.

“The changed political environment has created more uncertainty regarding the potential benefits we expected to achieve,” said Salix President and CEO Carolyn Logan in a statement

salix pharmaceuticals

Salix may not have gotten any tax benefits from the merger

The plan had been for Salix Pharmaceuticals, Ltd. (NASDAQ:SLXP) and Cosmo Technologies (Cosmo Pharmaceuticals S.p.A (SWX:COPN) Irish subsidiary to merge, giving Salix a 20% stake in the new company – Ireland is a favorite location for tax inversions because of its low corporate tax rate. But new tax inversion rules will likely check whether the majority of a company’s owners, employees, and business have remained in the US even if the company becomes incorporated somewhere else. Since Salix Pharmaceuticals doesn’t have any plans to physically leave its headquarters in North Carolina, there’s a good chance that it would get caught up in the changes. Since the courts typically allow tax changes like this to be applied retroactively for up to about a year, Salix’s decision means that the company expects reasonably prompt action after the new Congress takes office early next year.

Cosmo seems a lot more upbeat about the whole thing, as you would expect from a company that just got $25 million for what amounts to a series of talks.

“The deal with Salix Pharmaceuticals, Ltd. (NASDAQ:SLXP) showed the potential of three products of ours for US. The development path of the pipeline continued in the meantime, so this termination has no effect on value creation,” said Cosmo CEO Alessandro Della Cha.

Big question is which tax inversion falls through next

Now the big question is whether other tax inversion that have been announced but not finalized are at risk of being canceled as well. It’s de rigueur to cite not-tax reasons for an inversion, but if the tax angle is falling apart we’ll get to see how many companies were serious about those other benefits based on who goes through with their mergers.

(h/t Chad Bray at DealBook).